Thank the jobless for home loan savings

On the face of it, today's labour force statistics are more of the same – the unemployment rate steady at 5.4 per cent, employment and unemployment up a bit, participation rate down a notch, hours worked off a little – but there's more happening under the surface as our labour market absorbs increased population growth and cuts interest rates.

With demand for labour remaining soft, the impact of our increasing population growth means the Reserve Bank's forecast of unemployment edging higher remains on track.

Australia can keep adding a few more jobs each month – a few more than the market tipsters expected in this month's tipping competition – but the explicit guidance from governor Stevens on Tuesday was that increasing unemployment will keep inflation tame over the next couple of years even as the impact of our strong dollar wanes.

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And that's why the RBA is easing monetary policy, without actually spelling it out. While everyone concentrates on what the RBA does to the cash rate, our central bank actually targets the rates people end up paying. So the RBA left the official rate unchanged on Tuesday but today Westpac announces it is cutting its two-year fixed-term home loan by 40 points to 4.99 per cent – monetary policy has been eased.

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And that's just one announced fixed-term offering. The variable rates actually charged by banks for new loans, as opposed to their official rates, are increasingly discounted for anyone who bothers to ask or play off one institution against the other. Walk into your bank today to tell them NAB's UBank wants to refinance your variable loan at 5.12 per cent with no fees and chances are you will walk out with a cheaper loan.

Just as the RBA made bigger cuts to its cash rate to allow for banks not passing on all of the reduction, for now it can leave the cash rate untouched and still ease rates.

As the governor mentioned on Tuesday, funding costs for our banks, big corporates and government have all come down. Implicit is that, if lending margins are held steady, competitive pressures will force banks to cut rates without the RBA moving.

The cheaper funding provides the means for banks to lower rates, but it's the softening labour market that allows the RBA to let them ease monetary policy.

Population factors

The fine print of Tuesday's ABS arrivals and departures statistics showed a net rise in permanent and long-term arrivals in the December half of 12 per cent over the same 2011 period. Long-term and permanent arrivals minus the same category of departures were 132,040 for the latest six months, compared with 118,000 last year.

That's why the RBA is predicting 1.7 per cent growth in the working age population this year. Over the year to January, the trend series shows just one per cent growth in employment and there's little reason to think that rate is picking up any time soon.

Hence the governor's more relaxed paragraph on the inflation outlook:

Inflation is consistent with the medium-term target, with both headline CPI and underlying measures at around 2¼ per cent on the latest reading. Looking ahead, with the labour market softening somewhat and unemployment edging higher, conditions are working to contain pressure on labour costs.

Moreover, businesses are likely to be focusing on lifting efficiency under conditions of moderate demand growth. These trends should help to keep inflation low, even as the effects on prices of the earlier exchange rate appreciation wane. The Bank's assessment remains that inflation will be consistent with the target over the next one to two years.